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Ruling

Subject: FBT - Car Fringe Benefit

Question 1

Where the employee, the State or Territory and a financier have entered into a novated leasing arrangement prior to 10 May 2011, will the old statutory rates used to calculate the taxable value of the car fringe benefit under section 9 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) continue to apply where, post 10 May 2011, the employee is re-assigned internally to another Department that becomes responsible for the payment of the employment costs?

Answer

No

Question 2

Where the employee, the State or Territory and a financier have entered into a novated leasing arrangement prior to 10 May 2011, will the old statutory rates used to calculate the taxable value of the car fringe benefit under section 9 of the FBTAA continue to apply where, post 10 May 2011, the employee is seconded to another Department with a chargeback of employment costs to the first Government Department?

Answer

Yes

Question 3

Where the employee, the State or Territory and a financier have entered into a novated leasing arrangement prior to 10 May 2011, will the old statutory rates used to calculate the taxable value of the car fringe benefit under section 9 of the FBTAA continue to apply where, post 10 May 2011, the employee is seconded to another Department without a chargeback of employment costs to the first Government Department?

Answer:

No

Question 4

Where the employee, the State or Territory and a financier have entered into a novated leasing arrangement prior to 10 May 2011, will the old statutory rates used to calculate the taxable value of the car fringe benefit under section 9 of the FBTAA continue to apply where, post 10 May 2011, the employee is re-assigned internally to another Department as part of Machinery of Government changes?

Answer:

No

This ruling applies for the following period:

1 April 2011 to 31 March 2012

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014

Relevant facts and circumstances

There are a number of employment arrangements by which your employees can be employed, including employment under the relevant Act and a contract of employment.

Under Act the Chief Executive of a department is, for the State responsible for the employment of public service employees of that department.

The State or Territory has nominated a number of eligible State or Territory bodies to be nominated State or Territory bodies under subsection 135S(1) of the FBTAA.

Since that nomination was made the employment arrangements of a number of employees have altered as a result of:

· employees being re-assigned between departments;

· employees being seconded to work in another department on either a short term or long term basis; and

· a Machinery of Government change.

Under your salary sacrifice arrangements employees are able to enter into a novated lease agreement for the use of a car for private purposes as part of a salary sacrifice agreement.

This ruling concerns the statutory percentage that is to be used under the statutory formula method to calculate the taxable value of the car fringe benefits that arise from the cars that are subject to a novated lease as part of a salary sacrifice agreement where:

· the novated lease was entered into prior to 10 May 2011; and

· the change in employment arrangement occurred after 10 May 2011.

Re-assignment of employees

When employees are internally re-assigned between Government Departments:

· employment costs are redirected to the new government department; and

· entitlements such as annual leave and long service leave are transferred with the employee.

Short term secondment

Under a short term secondment the employee remains on the payroll of the department from which the employee is seconded (home department). The home department then invoices the second department for the seconded employee's remuneration costs.

Long term secondment

Under a long term secondment the employee will be transferred from the home department's payroll to the payroll of the second department.

Machinery of Government change

You recently had a Machinery of Government change which established a number of new departments, changed the name of a number of departments and amalgamated a number of departments. The newly established eligible State or Territory bodies were nominated to be nominated State or Territory bodies.

Where an employee was transferred to another department, the new department became responsible for paying the remuneration costs of the employee.

The following documentation was provided in relation to the ruling application:

· Standard Deed of Novation;

· Salary Packaging Agreement & Application Form; and

· Payroll commencement form.

Reasons for decision

Which statutory percentage will apply where an employee who entered into a novated leasing arrangement prior to 10 May 2011 with the State or Territory and a financier where post 10 May 2011, the employee is transferred to another department?

In general terms if the statutory formula method is used to calculate the taxable value of a car fringe benefit, the taxable value of the fringe benefit will be a percentage of the car's value.

Prior to 10 May 2011, the percentage used in the calculation depended upon the annualised number of kilometres travelled by the car during the year. The percentages were as follows:

However, these rates were amended by Tax Laws Amendment (2011 Measures No. 5) Act 2011. The amendments restricted the use of these rates to cars for which there is a pre-existing commitment in place for the car to be provided to a particular employee.

The application of the changed rates is contained in item 8 of schedule 5 of Tax Laws Amendment (2011 Measures No. 5) Act 2011 which states:

Application provision

The amendments made by this Part apply to a car fringe benefit in relation to a year of tax beginning on or after 1 April 2011, whether the car fringe benefit is provided before, on or after the commencement of this item.

Despite subitem (1), the amendments do not apply to a car fringe benefit, in relation to an employer in relation to a year of tax, that relates to a car, if:

· any car fringe benefit, in relation to the employer in relation to the year of tax in respect of employment of an employee by the employer, that relates to the car is constituted by the application or availability of the car for a period; and

(b) the last time at which:

(i) the employer, or an associate of the employer; or

(ii) the employee, or an associate of the employee;

· committed to the application or availability of the car for that period, in respect of the employment, occurred before 7.30pm Australian Eastern Standard Time on 10 May 2011.

Note: The effect of subitem (2) is that the amendments will not apply until the first year of tax starting after the employer, employee or associate first commits, after 7.30 pm Australian Eastern Standard Time on 10 May 2011, to the application or availability of the car.

Therefore, in considering whether the new rates will apply to the calculation of the taxable value of a car fringe benefit it is necessary to determine the last time at which:

· the employer or an associate of the employer; and

· the employee or an associate of the employee

· committed to the application of the car.

As set out in the note to item 8, for the new rates to apply, the employer, or the employee or their associates needs to have made a commitment after 7.30 pm Australian Eastern Standard Time (AEST) on 10 May 2011.

The term 'commitment' is not defined in either Tax Laws Amendment (2011 Measures No. 5) Act 2011 or the Fringe Benefits Tax Assessment Act 1986 (FBTAA). However, the meaning to be applied was discussed in paragraphs 5.51 and 5.52 of the Explanatory Memorandum to Tax Laws Amendment (2011 Measures No. 5) Act 2011.

Paragraphs 5.51 and 5.52 state:

5.51 A commitment is considered entered into at the point that there is commitment to the transaction, and it cannot be backed out of. The commitment needs to be financially binding on one or more of the parties.

5.52 Changes made after 7:30 pm, AEST on 10 May 2011 to commitments made prior to 7:30 pm, AEST on 10 May 2011, such as re-financing a car, altering the duration of an existing contract or changing employers, are new commitments and will therefore be subject to the new arrangements.

Further discussion of the meaning of the term 'commitment' is contained within chapter 7 of the publication Fringe benefits tax: a guide for employers which states:

Meaning of the term commitment

A 'commitment' is entered into at the point there is a financially binding commitment to a transaction on one or more of the parties and it cannot be backed out of. The commitment needs to be one that relates to the application or availability of the car to an employee or associate.

For example, there are a number of steps involved where you negotiate with an employee and a salary packaging provider to put in place a novated lease arrangement in relation to a car. A commitment would generally be entered into, and would be financially binding, when you or the employee orders the car that is to be provided by way of a novated lease arrangement and there is a financial penalty if the order is cancelled.

Chapter 7 then provides examples of how this principle is to be applied. In relation to the situation where there is a change of employer chapter 7 states:

Change of employer or change of car

FBT applies to you as an employer. Any change of the employer, even, within the same group of companies, will constitute a new commitment to the application or availability of the car by the new employer. This means the statutory rate of 20% (or applicable transitional rate) will be used by the new employer immediately.

Likewise, any change of car (after 7.30pm AEST on 10 May 2011) will always be a new commitment to which the 20% flat rate (or applicable transitional rate) will apply immediately, even where the employer stays the same.

Example: Change in employer

Anna works for X Co and entered into a three year novated lease arrangement with her employer in January 2010. The car fringe benefits are valued by her employer using the statutory formula method.

On 12 November 2011, Y Co officially takes over X Co and Anna is now an employee of Y Co.

As Anna's employer has changed, car fringe benefits provided by the new employer from 12 November 2011 will come under the new statutory rates immediately.

In your ruling application you asked whether the percentages that applied prior to 10 May 2011 would continue to apply in four situations in which the employee is transferred between departments. In asking the questions you contended the percentages could continue to be used for the following reasons:

· the State or Territory is the legal employer of the employees. Therefore, the transfer of employees between departments will not constitute a change in the legal employer;

· when employees are reassigned between government departments, the terms of the Deed of Novation and the legal financial obligations do not change. Therefore, based on the term ordinary meaning of the term 'committed', the relevant government departments have not been bound or pledged to the application or availability of the car under any explicit or implied contractual arrangement;

· the State or Territory is considered an associate of all the relevant government departments. Therefore, even if there is a change of employer for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) due to an employee transferring between government departments, the last time the associate of the employer and the employee committed to the application or availability of the car was before 10 May 2011; and

· section 135X of the FBTAA is intended to avoid unintended consequences arising from a Machinery of Government change.

Each of these four contentions are considered below:

The State or Territory is the legal employer of the employees

The first of your contentions is that the relevant 'employer' for the purposes of paragraph 8(2)(b) of schedule 5 of Tax Laws Amendment (2011 Measures No. 5) Act 2011 is the legal employer. While we agree the State or Territory is the legal employer and that a transfer between departments would not constitute a change of employers if the two departments were not a 'nominated State or Territory body', we do not agree with your contention that the legal employer is the 'employer' for the purposes of the FBTAA where the employee has a 'sufficient connection' with a nominated State or Territory body.

Part XIC of the FBTAA enables a State or Territory to nominate an 'eligible State or Territory body' to be taken to be the employer of the employees that have a sufficient connection with the body. Once a nomination is made, subsection 135U(1) of the FBTAA provides that the 'nominated State or Territory body' is to be taken to be the employer of each employee of the State or Territory that has a 'sufficient connection' with the body.

As the employees have a 'sufficient connection' with a 'nominated State or Territory body', the relevant 'nominated State or Territory body' is taken for the purposes of the FBTAA to be the 'employer' of the relevant 'employee'. Therefore, where an employee is either:

· transferred to another 'nominated State or Territory body' with which the employee has a 'sufficient connection'; or

· is transferred to a body which is not a 'nominated State or Territory body'

· there will be a change of employer. In the first situation, the new employer is the 'nominated State or Territory body' to which the employee is transferred, while in the second situation the new employer will be the State Government if the employee is transferred to a department that is not a 'nominated State or Territory body'.

A new 'commitment is not entered into as the terms of the Deed of Novation and the legal financial obligations do not change

This contention appears to be based on the premise that the commitment occurs when the lease agreement is entered into.

We consider that the term 'commitment' is to be viewed in a broader context that just the point at which the lease agreement is entered into. As set out in Fringe benefits tax: a guide for employers a 'commitment' is entered into at the point there is a financially binding commitment. This is not restricted to the signing of the lease. It includes the commitment that arises when the employer becomes obliged to make the lease payments as part of the remuneration for the employee's services.

Therefore, it is possible for a new commitment to be made, even though a new lease has not been entered into. For example, a new commitment will occur where an employee transfers between employers if the new employer becomes responsible for paying the lease payments as part of the remuneration that is paid to the employee for the performance of his or her duties.

The last time at which a commitment was made by an associate of the employer

This contention appears to be similar to the previous contention as it appears to be based on the premise that sub paragraph 8(2)(b)(i) looks at the time at which the employer, or an associate of the employer signed the lease.

As discussed above, we consider the term 'commitment' to be broader than just the signing of the lease. In a situation where the lease is signed by the original department on behalf of the State or Territory Government, a new commitment will occur where the responsibility for making the lease payments is transferred to a new department as a result of the employee being transferred to the new department. In such a situation, the last time at which the employer (the new department) committed to the application or availability of the car is after 10 May 2011. This conclusion will not be affected by the commitment that was made by the associate of the employer (the original department) prior to 10 May 2011.

The application of section 135X

In your application you suggest the triggering of the new rates by a Machinery of Government change would be an unintended consequence and that the intention of section 135X was to ensure that a nomination made under Part XIC does not have unintended consequences.

As set out in the Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 2001, section 135X has two objects. The first is to ensure that the calculation of the taxable value of certain fringe benefits is not affected as a result of a break in the continuity of certain record keeping requirements solely because of a 'transitional event'. The second object is to preserve the character of certain benefits where the character would otherwise be lost solely because of a 'transitional event'

A 'transitional event' is defined in subsection 135X(2) as:

· the making of a nomination under section 135S;

· the variation of a nomination under section 135S;

· the revocation of a nomination under section 135S; or

· the cessation of the existence of a nominated State or Territory body.

Although a 'transitional event' will cause a change of employer that may trigger the use of the new rates, the Explanatory Memorandum makes clear that section 135X is only intended to apply in certain circumstances where the change will result in a break in the continuity of certain record keeping requirements, or where the character of the benefit would be lost because of a transitional event. A change in the statutory rate does not come within either of these situations as it is not a record keeping provision and the character of the benefit will not be altered. The benefit will remain a car fringe benefit.

Your ruling application asked about the statutory rates to be used in the following four situations:

· employee is re-assigned internally to another Department which becomes responsible for the payment of employment costs;

· employee is re-assigned internally to another Department, but the original Department continues to be responsible for the payment of employment costs which it recovers from the Department to which the employee is assigned;

· employee is seconded to work in another Department which becomes responsible for the payment of employment costs; and

· employee is re-assigned under a Machinery of Government change to work in another Department which becomes responsible for the payment of employment costs.

Each of these four situations is considered below:

Employee is re-assigned internally to another Department which becomes responsible for the payment of employment costs

To determine the relevant statutory rate to use after the employee has been re-assigned it is necessary to determine:

· if relevant, the last time at which the employer committed to the application or availability of the car for the relevant period;

· if relevant, the last time at which an associate of the employer committed to the application or availability of the car;

· if relevant, the last time at which the employee committed to the application or availability of the car; and

· if relevant, the last time at which an associate of the employee committed to the application or availability of the car.

For the purpose of applying these tests the employer will be the Department that has the responsibility for paying the employee's salary or wages (assuming the Department is a 'nominated State or Territory body'). If the Department that is responsible for paying the salary or wages is not a 'nominated State or Territory body', the employer may be the State, or it may be another 'nominated State or Territory body' if the employee is part of a class of employees that has been nominated as having a sufficient connection with the nominated 'State or Territory body' under paragraph 135S(2)(c) of the FBTAA.

In the scenario being considered, the Department to which the employee has been assigned is a 'nominated State or Territory body'. As it is responsible for paying the salary or wages to the employee it will be the employer.

Under subsection 135U(5) the employer as a 'nominated State or Territory body' is taken to be a company and each of other nominated State or Territory bodies of the State and the State are taken to be companies related to the employer. Therefore, in applying paragraph 159(2)(a) the employer will be an associate of each of the other nominated State or Territory bodies of the State and the State.

Therefore, in considering the above tests:

· the last time at which the employer committed to the application or availability of the car for the relevant period will be the date on which the employer became responsible for paying salary or wages to the employee. As the assignment occurred after 10 May 2011 this was after 7.30pm Australian Eastern Standard Time on 10 May 2011;

· as the Department from which the employee was assigned is an associate of the employer, the last time at which an associate of the employer committed to the application or availability of the car was the later of the date on which the original Department signed the novated lease documentation, or became responsible for the payment of salary or wages to the employee;

· the last time at which the employee committed to the application or availability of the car was the date on which the employee signed the novated lease; and

· an associate of the employee has not made a commitment in relation to application or availability of the car.

As one of these commitments occurred after 10 May 2011, the new rates will apply from the date of the assignment as this is the date on which the employer became responsible for the payment of the salary or wages.

The relevant rate that will apply will depend upon whether an election is made to skip the transitional arrangements and if an election is not made, the distance travelled by the car.

In discussing the possibility of making an election to skip the transitional arrangements chapter 7 of Fringe benefits tax: a guide for employers states:

For any new commitments entered into during this period, you can choose to skip the transitional arrangements and apply the 20% statutory rate; however, this choice is subject to certain conditions mentioned below.

You cannot skip the transitional arrangements where an employee would be worse off as a result of this choice. That is, the employee cannot be placed at a direct financial disadvantage as a result of this choice, unless you have obtained the consent of the employee.

For example, you cannot require an employee to bear the financial impact of skipping the transitional arrangements by charging the employee a higher salary packaging amount as a result of an increase in FBT payable merely to save on compliance costs, unless you have obtained the consent of the employee to do so.

The choice to skip the transitional arrangements is on a car-by-car basis.

You do not need to notify us of your choice, as your business records are sufficient evidence of this.

If an election is not made, the relevant percentage will be determined by the number of kilometres travelled by the car during the period in the FBT year when the car was held by the provider of the car fringe benefit. The rates are as follows:

Employee is re-assigned internally to another Department, but the original Department continues to be responsible for the payment of employment costs which it recovers from the Department to which the employee is assigned

In this second situation the Department to which the employee is assigned does not become responsible for paying the employee's salary or wages. Consequently, the employer does not change.

Therefore, in considering the tests:

· the last time at which the employer committed to the application or availability of the car was the later of the date on which the employer signed the novated lease documentation, or became responsible for the payment of salary or wages to the employee. Both of these were before 10 May 2011;

· an associate of the employer has not made a commitment in relation to application or availability of the car;

· the last time at which the employee committed to the application or availability of the car was the date on which the employee signed the novated lease; and

· an associate of the employee has not made a commitment in relation to application or availability of the car.

As all of the commitments were made before 10 May 2011 the old rates will continue to apply to the calculation of the taxable value of the car fringe benefits.

Employee is seconded to work in another Department which becomes responsible for the payment of employment costs;

The outcome in this scenario is the same as the first as the Department to which the employer is seconded becomes responsible for the payment of employment costs. Therefore, as set out in relation to the first scenario:

· the last time at which the employer committed to the application or availability of the car for the relevant period will be the date on which the employer became responsible for paying salary or wages to the employee. As the secondment occurred after 10 May 2011 this was after 7.30pm Australian Eastern Standard Time on 10 May 2011;

· as the Department from which the employee was seconded is an associate of the employer, the last time at which an associate of the employer committed to the application or availability of the car was the later of the date on which the original Department signed the novated lease documentation, or became responsible for the payment of salary or wages to the employee;

· the last time at which the employee committed to the application or availability of the car was the date on which the employee signed the novated lease; and

· an associate of the employee has not made a commitment in relation to application or availability of the car.

As one of these commitments occurred after 10 May 2011 the new rates will apply from the date of the secondment as this is the date on which the employer became responsible for the payment of the salary or wages.

Employee is re-assigned under a Machinery of Government change to work in another Department which becomes responsible for the payment of employment costs.

The outcome in this scenario is the same as the first and third scenarios as the Department to which the employer is assigned becomes responsible for the payment of employment costs. Therefore, as set out in relation to the first scenario:

· the last time at which the employer committed to the application or availability of the car for the relevant period will be the date on which the employer became responsible for paying salary or wages to the employee. As the assignment occurred after 10 May 2011 this was after 7.30pm Australian Eastern Standard Time on 10 May 2011;

· as the Department from which the employee was assigned is an associate of the employer, the last time at which an associate of the employer committed to the application or availability of the car was the later of the date on which the original Department signed the novated lease documentation, or became responsible for the payment of salary or wages to the employee;

· the last time at which the employee committed to the application or availability of the car was the date on which the employee signed the novated lease; and

· an associate of the employee has not made a commitment in relation to application or availability of the car.

As one of these commitments occurred after 10 May 2011 the new rates will apply from the date of the secondment as this is the date on which the employer became responsible for the payment of the salary or wages.